The Chinese Automotive Market – Much more than just large

June 22, 2017

The Chinese market reached 23 mio units sold in 2016 and accounted for around 30% of global passenger car sales1, which makes China the largest car market by far. The automotive industry is considered one of the main pillars of the Chinese economy and the government continues to regulate and control it in various ways.

China has remained the world’s largest automotive market and automotive manufacturing country since 2009. There was a compound annual growth rate (CAGR) of 18,1% from 2005 to 2012.

Figure 1: China vehicle sales 2008 – 2016; Statista 2017

In 2016, the official China Association of Automobile Manufacturers (CAAM)2 reported that China’s auto industry enjoyed rapid growth, with its sales and production both hitting new records. The production and sales of automobiles (passenger & commercial vehicles) were 28,119.000 and 28,028,000 units respectively, up 14.5% and 13.7% year on year, 11,2% and 9.0% higher than in 2015.3

The automotive sales market will likely climb 5% in 2017 to 29.4 million vehicles, still triggered by a tax cut policy starting in 2015. The sales tax on cars with engines of 1.6 liters or below was cut to 5% (from 10%) in late 2015, giving the auto industry a much-needed boost as the economy slowed. The tax is set to rise again to 7,5% for 2017, before returning to 10% in 2018.

After strong growth for nearly a decade (CAGR of 18,1%), the Chinese automotive market is reaching a critical point in its development. Growth has shifted to a more modest rate, also referred to as “new normal” also assumed for most of the targeted industries in the latest version of the 5-Year Plan (13th).4

The local Chinese automotive production base counts more than 75 OEM groups and 184 vehicle assemblers. The so called “zombie-automakers” licenses from SOEs (State owned Enterprises) will be banned and an accelerated consolidation process is expected. However, it is forecasted to have an excess capacity of round 20% and a consolidated assembly volume with moderate growth of around 5% per annum.5

Before the 1980s China did not allow private citizens to purchase motor vehicles for personal use and therefore did not develop passenger car production. In the mid-1980s, when the control on private purchase was lifted, the number of personal-use automobiles began to grow; by 1985, 3,500 cars a year were being imported.6

The Chinese Automotive industry in a global context

The combination of social economic growth, private welfare, central policy, high attractiveness for foreign brands, and the desire to own cars, built the base for an enormous leap forward for the Chinese Automotive industry. Despite the global crisis during 2009 and onwards, the production kept growing, and rose to Nr. 1 in the world.

During the second half of 2016, production in China accelerated back into double digit growth. More stable financial markets and demand stimulated by government policy, brought full year volumes up 18.6%. China maintained its leading position among passenger car producers with 22.5 million units rolling of the assembly lines, accounting for 30% of global production.

China is about to reach 30 mio vehicles and a global market share of 30%.

Lifting of foreign ownership restrictions will transform the industry7

In 2016, the State Council has ruled that foreign investors may establish wholly foreign owned enterprises to manufacture motorcycles in Free Trade Zones in China. This might be seen as a sign that the long-discussed ownership restrictions in automotive manufacturing could be eased and finally lifted as well.

The lifting of foreign ownership restrictions in auto manufacturing will lead to a substantial transformation of the auto industry in China. In terms of the players in the auto manufacturing industry, long-term preparation and consideration shall be required for such lifting of restrictions.

Chinese buyers can choose between more brands and more cars than any other car buyer in any other country. As of May 2016, there are 130 passenger car brands available in China. There are three kinds of brands: the foreign brands, the local Chinese brands and the sub-brands under foreign-Chinese car making joint ventures.8

A snapshot in 2011 shows that 44.3% of the total number of automobiles were produced by local firms, including Geely, Chery, Hafei, Jianghuai, Great Wall and Roewe, and the rest of the vehicles come from global companies.

13th 5YP to shape the Chinese Automotive industry for the future

Importantly, China’s 13th five-year plan (2016 – 2020) begins while Beijing is experiencing its slowest growth in decades, while at the same time China grapples with reforming and rebalancing many facets of its command-based economy.9 The global implications are that China is the world’s largest auto market, accounting for some 25 percent of all new light vehicles sold annually, and generating approximately $470 billion USD in 2015.

The Chinese government would like to see innovative Chinese-brands dominate the market for new energy vehicles (NEVs). The broader auto market in China is, and is likely to remain, driven by sales of gasoline-powered vehicles, and where the majority of these vehicles are sold under the brands of foreign automakers. While Chinese industrial policy has succeeded in creating the world’s largest automobile market, China’s auto industry is paradoxically large but weak.

There are two main reasons why China’s large auto market struggles to produce a globally competitive automaker. The first has to do with China’s joint venture (JV) policy, which has ironically made SOEs profitable while hampering their motivation to develop their own branded cars. The second reason has to do with the fragmented and fiercely competitive nature of the Chinese auto industry, which has dampened the ability of China’s more entrepreneurial independent automakers to build market share, invest in innovation, and achieve economies of scale.

The two main structural framework policies for the Automotive industry are:

The introduction of the “new normal” defined in “Bottom line: 6.5% annual average growth GDP from 2016 to 2020 to double 2010 GDP per capita”

The green development by 2020 to reduce emissions per unit of GDP by 40, to 45% compared to 2005 levels. Increase the share of non-fossil fuel energy to 15% by 2020

13th 5YP impact for Chinese Automotive industry – Main topics:

Innovation

-OEM & Suppliers: Technology & Business model

-Regulators: Power delegation & administration streamline

Green Cars

-Energy saving, new energy

-Green business model

-Promotion & penetration of green car

Globalization

-Participate into the global economic framework; increase China product supply the world market

-Go outbound; One belt one road

-Consume excess capacity

Collaboration

-Address regional inequality and economic gap between urban and rural area

-Collaboration between industries to serve a target of balanced development

As China has slowly embraced a more market-based economy, the FYP exercise has been transformed from a long list of specific production targets to a long list of strategic priorities. Under China’s 13th Five-Year Plan, efforts will be made to implement the Made in China 2025 initiative in greater depth, with a view to achieving the country’s objectives of becoming a manufacturing powerhouse, creating a favourable environment for the growth of new strategic industries, and optimising modern industrial systems. The Made in China 2025 initiative also mentions that under the premise of enhancing the innovation capability of the manufacturing industry, innovative design demonstration projects will be unfolded in key sectors including traditional manufacturing industries and new strategic industries, where advanced designs and technologies featuring green and smart concepts will be popularised and applied.

The 13th Five-Year Plan clearly sets out that the development of new strategic industries will be vigorously promoted and it is hoped that, through such measures as industrial policy guidelines and the national strategic industries development fund, the role of emerging industries in supporting the development of the manufacturing industry and the overall economy will be enhanced. One of the development objectives and actions include “New-energy cars – Develop pure electric cars and plug-in hybrid electric vehicles to boost output and sale of new-energy vehicles across the country to five million units, and strengthen recovery and treatment of old and waste batteries of new-energy cars.”

China Automotive industry – Imports vs. Exports

According to the statistics from the Ministry of Industry and Information Technology (MIIT), in 2015, China exported 755,500 units of completed cars valued at $12.4 billion and China imported 1.1 million units from overseas valued $45 billion.

Figure 5: EU trade figures, Economic and Market Report, ACEA 2017

Europe is the largest automobile exporter to China followed by Japan, the US and Korea. In 2014, Europe exported over 630,000 vehicles to China, which accounted for 45% of China’s total vehicle imports. Europe’s volume of exports to China increased by 81% from 2010-2014. In 2014, Germany was the largest exporter, followed by the UK and Belgium.

The current market status & trends

The passenger vehicle segment is dominated by foreign brands that account for 62% of the market, while the commercial vehicle segment is dominated by domestic brands with over 90% of the market share. Utility Vehicles (SUV, year-on-year increase of 36.4%) and Multi-Purpose Vehicles (MPV) recorded higher sales of growth (46.8% year-on-year) than Sedans (3.1% year-on-year increase).

The Ministry of Industry and Information Technology (MIIT) reported that the number of registered vehicles in China reached 154 million by the end of 2014 and is forecast to exceed 200 million by the end of 2020.

The automobile ownership rate is still very low; by the end of 2014, ownership per 1,000 people exceeded 105 units for the first time, but this is still well below the global average of 140 units. In major European countries, the rate is 550 – 600 per 1,000 people; the US is even above 800!

Although Volkswagen remains the dominant market leader, Chery, Geely, SAIC, FAW, BAIC, Toyota and Honda are all catching up fast.

Recently, with the development of China’s auto market, local brands have been developing rapidly. From the early cheap small cars to the current miniature, compact, mid-sized, large and various SUV models, Chinese brands are no longer manufacturing simple cars, but developing higher standards and paying more attention to quality.

China’s auto production is concentrated in 10 regions, which accounted for 72% of China’s total output in 2013.

Overall trends for the Chinese Automotive industry

Positive factors:

Integration in the automobile industry contributes to solving the problems in excess capacity for the domestic brands.

Tier 2 and Tier 3 cities have unlimited potential to be developed. Also, demands for the premium vehicles in tier 1 cities are another profitable market.

NEV (Neighbourhood Electric Vehicle) is still dominating the automotive market with a dramatic growth thanks to series of favourable policies.

Negative factors:

Tax cut for vehicles below 1.6 l will expire by the end of 2016, knocking back the overall market.

Key trends for the Chinese Automotive industry

Figure 6: Three key trends in automotive industry, PwC strategy2016

Positive drivers:

Chinese government announced that new automakers who are expected to produce fuel consumption vehicles will not allowed to be founded in principle. It is good news for the development of alternative energy vehicles.

The government plans to support domestic companies working on connectivity and new energy technologies. Within the “Made in China 2025” initiative, intelligent connected cars are contributing to:

Reduce traffic accidents by more than 30%

Reduce traffic fatalities by more than 10%

To set a safe autonomous driving speed of 120 km/h

To save energy consumption by more than 10%

Reduce emissions by more than 20%

The global investment activities in the Automotive industry

China’s global outbound FDI continued to surge in 2015 and the Chinese leadership touts investment as a new pillar of China’s positive contributions to the global economy.10

Figure 7: China’s Global Outward FDI boom continues, metrics 2016

Europe has emerged as a main destination for Chinese OFDI, in line with a broader shift of Chinese investment from developing and emerging to high-income economies.

The most iconic takeover was certainly Geely Automotive buying Volvo Cars Corporation for 1,256.7 m Euro in 2009 from Ford, under whose ownership sales fell and it incurred losses. The Chinese owner poured investment into new models, manufacturing and technology including self-driving cars, where it is a pioneer. Ford itself paid $6.45bn for Volvo back in 1999 when the car operations spun off from the wider Volvo business. Under Geely, the carmaker is back in profit and selling well in China. The move to produce both Volvo and the Lynk & Co brand to bring manufacturing under the same roof is the latest step in efforts to tighten ties between Volvo and Geely by transferring European know-how to Geely while maintaining the Swedish automaker’s business and reputation. The Geely takeover is a 100% ownership of Volvo and related assets, including all intellectual property rights, supply and R&D agreements.

The lightweight aspect in the Chinese automotive industry11

As in a classical China JV situation “For the most part, JV partnerships are structured such that Chinese firms are in charge of auto assembly operations and the foreign firm is in charge of new car designs and branding.” A limited impulse can be expected from the SOE themselves. New vehicle concepts are mostly “imported” and adapted to local needs. However, the lightweight material mix plays an important role in achieving efficiency and performance. This fact can also change when Chinese brands gain more international importance, when entering high-tech and major markets, such as Europe and the US.

It is clear that the development of “the energy-saving/new-energy automobile” and “the new material” are two of the top ten key fields to be pushed by the national government, the lightweight development is listed as one of the major aspects, in the report of “China Manufacturing 2025”, which was examined and approved by the executive meeting of the state council in 2015;

Among all the lightweight materials, steel is on top but with a decreasing rate annually, the usage of aluminium alloy, magnesium alloy, engineering plastic and composite plastic are increasing

In another governmental document named as “guideline for the improvement of the market and the restructure for the nonferrous metals industry” approved by the state council, the development of aluminium in the passenger car will be encouraged by the national government;

The usage of magnesium alloy on single vehicle was about 3.37kg in 2011; the number will increase to 8.6 kg in 2017 and be expected to reach more than 20 kg in 2022.

Converted into practical use, we would see a Mg alloy consumption of 260,000 mt (28 mio light vehicle cars assembled x 8,6 kg), which is certainly an overestimation, but anyway it provides an outlook to 660,000 mt by 2020.

Challenges for the development of lightweight material in the auto industry:

Wide variations in variety and performance between different lightweight materials;

Difficulties of the involvement for the local suppliers in the supplying chain of the multinational auto groups;

Martin Tauber is the first President of the Critical Raw Material (CRM) Alliance. Martin is an international marketing, sales & business development executive with more than 20 years’ experience. Engaged and determined to stimulate the need of magnesium metal and to introduce a more environmental friendly primary and secondary production on a global level. Since 2009 he is working as an independent industry consultant, whereas 5 years exclusively for Magontec serving as Vice President Strategy & Business Development. He has been also representing various industries in European and international Trade & Business Associations including the International Magnesium Association (IMA). Previously, he has held various sales & marketing positions working for: EOC Group, Belgium; Norsk Hydro Magnesium, Belgium; Borealis AB, Sweden; and PCD Polymere, Austria. He holds a PhD social and economic science from the University of Linz, Austria.

The Chinese Automotive Market – Much more than just large was last modified: June 22nd, 2017 by Maria Cox

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